Class Actions

We’ve discussed before how phishing scams target employers. A new scam focuses on defendants who have settled class-action claims. The scammers send wire transfer instructions that appear to come from reputable class-action claims administrators. If the defendant wires the funds though, it eventually discovers that it is the victim of a spear phishing attack and that the account it wired the funds do is fraudulent. It is unlikely to ever see that money again, but still owes the money it agreed to provide to the class-action plaintiffs and their attorneys.

We heard this cautionary tale from a LA Superior Court judge who wanted to get the word out about this new scam. Some poor company, which the judge understandably didn’t name, was out $500,000. This could obviously happen in any case, but is a bigger risk in cases where the settlement details and timeline for payment are readily available.

Earlier this week, I was advising a client on the termination of one of their spa employees. During the course of the conversation about his poor performance, the issue of his compensation came up. Turns out, while the termination was completely legitimate and non-discriminatory, we discovered liability for the client based on the employee’s commission-only salary structure and failure to provide meal and paid rest breaks. The next evening, while having my haircut, I raised this compensation structure with my stylist, also a massage therapist at a Southern California spa. Lo and behold, same arrangement.

Yesterday, a judge approved a nearly one million dollar settlement for the Sonoma Mission Inn’s posh Willow Stream Spa to settle a wage and hour, 103-member, class action lawsuit. That doesn’t sound relaxing at all.

Here are some issues I have seen the past few months that can get spas and salons in trouble:

1) Paying by piecework (e.g. per treatment or service): this implicates AB 1513, which became effective January 2016, and requires compensation for all hours worked during a pay period, including breaks and other “non-productive” time. Many workers on a piece work plan are still not being paid for breaks as required by law. AB 1513 also requires a host of record-keeping obligations.

2) Paying by commission: legally speaking, commission payments are a percentage of sales and should not be paid for services performed. With spa or salon employees, it is arguable whether they really “sell” anything, in which case, a commission structure doesn’t work. Payment by commission requires the terms to be in writing and paid in the pay period they are earned. Employers frequently confuse the piece-rate and commission concepts and wind up in non-compliance.

3) Failing to pay minimum wage or overtime: because of the issues above, some spa workers are not receiving proper minimum wage or overtime payments. At spas where the compensation is a hybrid of compensation schemes, employers must be careful to calculate the regular rate properly.

4) Misclassification: some employers are still classifying therapists and aestheticians as independent contractors in likely violation of CA law. Because these workers are working in the spas at the direction of management, it’s a tough argument to make that such workers are independent contractors and exempt from the issues above.

If you are thinking you need a massage (or stiff drink) after reading this, I’m sure you’re not alone.

California has the most stringent meal and rest break rules in the country. If an employee’s break is not taken within the proper time, is not long enough, or is interrupted, the employer is subject to a one-hour penalty. It’s one thing to impose a penalty on employers for not providing a mandated break. But imposing a penalty because the break is minutes late creates absurd situations.

Here’s just one example. Nonexempt employees get a 10-minute rest period every four hours or “major fraction thereof.” So an employee who works 10 hours gets two rest periods (plus a meal break). But if the employee works past 10 hours, she becomes entitled to a third rest period. If she isn’t offered it, the employer owes her a one-hour penalty. Suppose the employee goes to her supervisor and says that she worked a bit past the 10-hour mark and she’s ready to go home. The supervisor asks if she’s taken a third rest period and she says “No.” The supervisor then has to offer her a 10-minute rest period. The employee obviously doesn’t want or need a rest period. She’d rather just go home. But if the employer doesn’t offer her the break, it owes her for an additional hour.

Every other jurisdiction manages to see that employees receive breaks without these overly restrictive and punitive provisions. If anything, the situation is getting worse with the recent decision in Augustus v. ABM Securityemphasizing that employers must not only “relieve their employees of all duties” during their breaks, but must also “relinquish any control over how employees spend their break time.” So don’t expect the number of class action lawsuits against California employers to decrease anytime soon.

Wages, salaries, and benefits make up a large proportion of costs for most businesses. One way to control these costs is to control how much overtime employees work. In California, nonexempt (i.e. hourly) employees are entitled to one and half times their regular rate of pay when they work more than eight hours in a workday or 40 hours in a workweek. They’re also entitled to time and a half for the first eight hours on the seventh day of work in a workweek. Any work in excess of 12 hours in one workday, or eight hours on the seventh workday in a workweek must be paid at twice the employee’s regular rate of pay.

Some businesses address excessive overtime by telling their workers that they need management approval to work overtime. If they work overtime without approval, however, you still need to pay them for that work. You can counsel them, or even take corrective action for their failure to follow instructions. But you still need to pay them. Employees who aren’t paid for all of their time can claim overtime violations, minimum wage violations (for time they weren’t compensated for), waiting time penalties (up to 30 days pay if they weren’t paid everything they were owed at termination), PAGA penalties, attorneys’ fees, and more. California has no shortage of exorbitant penalties for seemingly minor violations.

Similar problems arise if employees who are forbidden to work overtime feel pressured to work “off the clock.” Take the example of a new nurse who needs to finish charting on his patients before he leaves for the day, but who’s also prohibited from working overtime. If he clocks out to finish his work and the employer knows about it, or reasonably should know about it, the employer needs to pay him for that time. Again, it can counsel him or take corrective action for not following the rules, but it can’t withhold his pay.

Managers working to reduce overtime need to make clear to their workers that they may not work off the clock. And if the managers learn of employees doing so, they need to ensure that they are paid for that time. Controlling overtime is an effective way of controlling costs, but only if you do it right. Do it wrong and you risk losing any possible savings and then some defending wage and hour claims.

The California Supreme Court has once again deviated from what many view as clear precedent of the U.S. Supreme Court concerning the enforcement of arbitration agreements. Last week, the California court decided McGill v. Citibank, N.A., holding that state “public policy” precludes the enforcement of arbitration agreements where a class sues for “public injunctive relief” under Business and Professions Code § 17200, California’s much abused “unfair competition” statute. This decision comes on the heels of Iskanian v. CLS, in which the California court held that a class waiver in an arbitration agreement was unenforceable to prevent a representative action under the Private Attorneys General Act, again citing “public policy.” The McGill and Iskanian decisions are at odds with recent SCOTUS opinions such as ATT Mobility v. Concepcion, and American Express Co. v. Italian Colors. In the Italian Colors case, the high court specifically rejected state “public policy” as any kind of exception to the sweeping preemption of the Federal Arbitration Act (“FAA”).

California has been in a running dog fight with the FAA since 1987. In that year, SCOTUS decided Perry v. Thomas, in which Justice Thurgood Marshal upheld the FAA under the Commerce and Supremacy clauses, and slapped down California’s attempt to undermine arbitration agreements. Thirty years later, California courts remain determined to block arbitration under PAGA and Section 17200 in the face of otherwise enforceable arbitration agreements.

Also, with today’s swearing in of Neil Gorsuch, SCOTUS returned to its full complement of nine justices. Look for the high court to grant review of California and Ninth Circuit cases that follow McGill and Iskanian in the next couple of years with an eye toward overturning those decisions. In the meantime, companies should continue to include waivers of class and representative actions in their arbitration agreements with consumers and employees, noting that the waivers are enforceable to the extent permitted by applicable law.

Last Friday, the US Supreme Court agreed to hear cases from the 9th, 7th, and 5th Circuits in which the courts are split on the issue whether class action waivers in employee arbitration agreements violate Section 7 of the National Labor Relations Act by inhibiting employees’ rights to engage in “concerted activity”. The NLRB has been promoting this novel theory for the past few years, under which the arbitration agreement can be invalidated notwithstanding the fact that it is otherwise enforceable under the preemptive effect of the Federal Arbitration Act. Readers of this blog will recall that the California Supreme Court rejected that theory in Iskanian v. CLS. The defendant in that case argued that a class action does not necessarily involve “concerted” action at all. A class action merely requires one employee with a complaint and a lawyer to file the case. Only in the world of legal fiction can such a case automatically constitute “concerted activity”. That legal fiction is a far cry from the scenario — several employees standing around the water cooler griping about wages and talking about unions and strikes — envisioned by Congress in 1935 when the phrase “concerted activity” was coined.

Now, the US Supreme Court will settle the issue, and the lower courts and particularly the NLRB will finally be bound by the result. The cases will be briefed and argued later in the year. By then, there will likely be a full complement of nine Justices on the Court. The current Court may be split 4-4 on this issue. The new Justice, assuming she or he is confirmed over what is likely to be fierce opposition in the Senate, will thus probably be the deciding vote in these cases. The cases are Morris v. Ernst&Young (9th Cir.), Lewis v. Epic Systems (7th Cir.), and Murphy Oil v. NLRB (5th Cir.). In these cases, and other employment cases likely to come before the Supreme Court in the near future, the stakes are high and the issues profound. As we have said before, what a difference an empty chair makes.

Let’s pick up where we left off. In our last post of 2016, I was complaining about the California Supreme Court’s decision in Augustus v. ABM Security Services, Inc.The majority opinion in that case said that employees who were required to carry phones or pagers on their rest breaks, even if they didn’t get called or paged, were deprived of their statutory breaks and were therefore owed a one-hour penalty. While I found plenty to complain about in that decision (I’m good that way), there’s another issue I want to address.

The third sentence of the decisions says: “During required rest periods, employers must relieve their employees of all duties and relinquish any control over how employees spend their break time.” The language comes from Brinker Restaurant Corp. v. Superior Court, which dealt with meal periods. But what does it mean? Are employees exempt from substance abuse, dress code, firearm possession, and harassment prevention policies during breaks? Stated differently, is the employer powerless if workers use their break time to get drunk, strip off their clothes, and chase co-workers around the workplace with guns demanding sexual favors? I’d like to think that the answer is “no,” but Augustus, in interpreting the wage orders, urges us to give language its “plain and commonsense meaning,” If that’s what we’re supposed to do, it would be nice if the courts chose their words with a little more care. The penalties for not complying with wage and hour laws are draconian enough without the laws being too vague for employers to know what’s expected.

The plaintiffs in this consolidated class action worked as security guards and were required to keep their pagers and radio phones on during their 10-minute rest periods and to respond when needs arose. ABM argued that it was providing a sufficient rest period. But the trial court disagreed and decided on plaintiffs summary judgment motions that they were not relieved of all duty and that they were therefore entitled to $90 million in damages, interest, and penalties (the penalty for missing a 10-minute rest period being an hour of pay).

The Industrial Welfare Commission Wage Orders clearly state that employees must be “relieved of all duty” during meal periods. But there is no corresponding language in the rest period requirement. Instead, the majority opinion intuited that employees must be relieved of all duties during rest periods from analyzing the definition of “rest.” The court also looked at Labor Code §226.7, which prohibits employers from requiring employees to work during rest periods. Finally, the court focused on the fact that the Wage Orders make provisions for on-duty meal periods, but not for on-duty rest periods. That being the case, it reasoned, on-duty rest periods must not be allowed.

All of this begs the question whether being required to carry a radio or pager constitutes work. The majority opinion states that employees are not relieved of all duties if they’re required to be on call. This conclusion, it notes, is the most consistent with its interpretation of the Wage Orders and Labor Code and with the axiom that those sources should be construed in a manner to protect employees.

A two-justice dissenting opinion explained that the “the bare requirement to carry a radio, phone, pager, or other communication device in case of emergency does not constitute ‘work’ in any relevant sense of the term.” This was especially true, the dissent noted, given the lack of any evidence that any guards’ rest breaks ever were, in fact, interrupted. The dissent also explained that the majority opinion creates further ambiguity by saying that the employees in question were deprived of their rest periods where they were required to “remain on call, vigilant, and at the ready during their rest periods.” If requiring employees to be “vigilant” and “at the ready” is part of what made these rest periods inadequate, the dissent asked, shouldn’t the court explain what that means? Or do we need another decade’s worth of class-action litigation to sort that out, too?

Here are steps employers should take now to comply with this decision:

Prohibit employees from carrying employer-provided pagers, radio phones, or similar communication devices at work.

In most situations, you should not prohibit employees from using their personal mobile phones on rest breaks, since the time is their own and they must be free from employer control. But you should not require them to monitor their phones.

If an employee’s rest period is interrupted with work requirements, either provide a different uninterrupted 10-minute rest period (you could start the 10 minutes running again after the interruption) or pay the penalty.

If, as the employer, you exercise any control over what employees can do during their rest periods, consult counsel as to whether that practice is still defensible.

When you draft employment arbitration agreements, it’s not enough to know what the law is. You should also know what the law will be at the time that someone challenges the agreement. Since this area of law changes continuously, that’s pretty hard to do without a crystal ball.

Last week, the Ninth Circuit issued a split opinion in Morris v. Ernst & Young saying that class action waivers violate the National Labor Relations Act. According to the two-justice majority, class action waivers violate § 7 of the Act, which states that:

“Employees shall have the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.”

While the National Labor Relations Board has taken the position that arbitration agreements are unenforceable in the non-union employment context, most courts to consider the issue have rejected that position as just another example of the Board going rogue. These include the Second, Fifth, and Eighth Circuit Courts of Appeal. Even the California Supreme Court, in Iskanian v. CLSTransportation, approved such waivers for class actions (but not for the seemingly analogous claims under California’s Private Attorneys General Act).

So employees can waive their right to present employment claims to a jury individually, but not on a class-wide basis? How can that be? More importantly, what should employers drafting arbitration agreements do about class action waivers?

The split between the circuits makes it increasingly likely that the U.S. Supreme Court will eventually address the issue. When that will happen and how the Court will be composed at the time is entirely unclear. So I plan to continue including class action waivers in arbitration agreements. But I will also include language inviting a court reviewing the agreement to strike any provisions that are inconsistent with applicable law as it exists at the time the agreement is being reviewed. My crystal ball says that’s the best way to go here.

The U.S. Department of Labor, among other things, enforces federal wage and hour laws. These include the overtime provisions of the Fair Labor Standards Act. When it believes employers have violated those laws, the DOL can pursue litigation on behalf of employees. Employers that don’t have the resources to litigate against the federal government frequently end up settling. But it’s not like settling with a private party, where the parties can agree to keep the settlement confidential. The DOL will issue a press release and post the settlement on its website.

Last week, the DOL agreed to pay $7 million in back overtime to a union representing a range of white-collar employees (the American Federation of Government Employees, Local 12). For some reason, I can’t find anything about this settlement on the DOL website. Maybe I’m looking in the wrong place. Perhaps I should look under the definition of irony.

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